- Continuous Mortality Investigation (CMI) releases new mortality projections model
- People still living longer but recent improvements lower than previously expected
- Insurers and reinsurers are beginning to reflect this emerging information
- Longevity uncertainty remains - schemes and sponsors should aim to better understand and manage their own risks
The latest projections from the Continuous Mortality Investigation (CMI) would reduce life expectancies at 65 by around 1.3% for males and 2% for females, compared to the previous version of the model. According to Mercer’s Pension Risk Report, at 30 December 2016 the pension liabilities for FTSE 350 employers were £857 billion so, in total and to the extent the experience underlying the new model has not already been allowed for, the adjustment could remove around £28 billion of pension scheme liabilities from company balance sheets.
Overall, in 2016, mortality in England and Wales was higher than was expected based on experience in previous years, and the increase in mortality has carried through to 2017. Over 140,000 people aged 65+ died in winter* 2016/17, compared to 126,000 in winter 2015/16, an increase of 11%. The number of respiratory-related deaths (often influenza) rose 21% between the two winters.
“There’s some debate about exactly why this has happened,” explained Glyn Bradley, Principal in Mercer’s Innovation, Policy and Research team. “Some point to the strain in the UK’s health and care system, caught between an ageing population and budget cuts. On the other hand, this winter’s excess mortality in the UK isn’t noticeably worse than for our European neighbours. What does seem to be occurring across the northern hemisphere is that winter flu has started comparatively early, starting in December in the UK. This means the calendar year 2016 could catch significant parts of two winter flu outbreaks, rather just one. Hospital admissions, for example, appear to have peaked in mid-January, whereas in 2016 they didn’t peak until March.”
Most trustees and sponsors of UK defined benefit schemes use a version of the “CMI Mortality Projections Model” to estimate how scheme members’ life expectancy could improve in the future, relative to experience. Between 2000 and 2011 mortality rates improved quite quickly, but since 2013 the core updates of these Models, which are based on England and Wales population experience, have generally revised down estimates of improvements in mortality both to date and also for the next decades ahead. The 2016 version incorporates data for 2016, and reinforces this trend, further cutting the estimated improvement in mortality over the next few years.
“In broad terms, mortality is roughly where it was in 2011,” explained Bradley. “Quite reasonably, given the dataset, the CMI’s 2016 model produces lower rates of mortality improvements than previously, particularly over the next decade. However, that’s quite short-term when it comes to pensions planning. The long-term drivers of future improvements in life expectancy remain. Medical research, application of past breakthroughs, innovative use of technology and potential for lifestyle improvements all mean that lifespans will continue to increase. When, with our partner RMS, we worked through the impact of these long term factors we saw how their impact on scheme funding could dwarf any liability reductions seen in the short-term.”
Andrew Ward, Partner, and UK Head of Risk Transfer at Mercer, added “Insurers and reinsurers are starting to factor this emerging data into their bulk annuity and longevity swap pricing and there is robust competition in the market.
“From a pension scheme perspective, this new data is still only a snapshot. It’s possible that population experience isn’t completely representative of average pension scheme membership, and some significant risks remain in a world where an extra year of life expectancy can add 5% to liabilities.
“Longevity is a major risk that few schemes have addressed in any way. Managing this now won’t be the right approach for everyone. However, as a minimum, all companies and trustees should seek to better understand the risk that longevity uncertainty poses to their financial health as well as the options available to remove this risk. This is particularly relevant as schemes develop their longer term plans either for a lower risk run-off or full buy-out.”
Notes to Editors
*To avoid distortions around bank holidays “winter” is taken to mean the 14 weeks ending on the last Friday in February. Death figures are based on England and Wales’ population death data, which previous studies have shown moves in a very similar way to the rest of the UK.
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